PERFORMANCE BOND / CONTRACT BOND
A performance bond, also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor.
A job requiring a payment and performance bond will usually require a bid bond, to bid the job. When the job is awarded to the winning bid, a payment and performance bond will then be required as a security to the job completion.
Performance bonds are commonly used in the construction and development of real property, where an owner or investor may require the developer to assure that contractors or project managers procure such bonds in order to guarantee that the value of the work will not be lost in the case of an unfortunate event (such as insolvency of the contractor). In other cases, a performance bond may be requested to be issued in other large contracts besides civil construction projects. Another example of this use is in commodity contracts where the seller is asked to provide a Bond to reassure the buyer that if the commodity being sold is not in fact delivered (for whatever reason) the buyer will at least receive compensation for his lost costs.
There are 6 Types of Contract Surety Bonds
- Bid Bond – As the name implies, this type of contract bond guarantees that if you bid on a particular project and are awarded the contract, you will honor the terms of your bid and sign all contracts related to the project. This prevents contractors from submitting a lowball bid and then changing the terms of the contract before work gets underway; or backing out of a contract after being awarded the bid.
- Performance Bond – A Performance Bond guarantees that you will adhere to all terms of the building contract and finish the job as promised. A Performance Bond requires contractors to stay on-budget and meet the predetermined completion deadline.
- Payment Bond – A Payment Bond acts as a guarantee to your subcontractors and suppliers that you will pay them for services and materials they provide to you for the project. This safeguards them against cash-strapped contractors who allocate all their resources toward honoring their building contract while failing to adequately compensate their subcontractors and suppliers.
- Supply Bond – A Supply Bond guarantees that you will be able to provide all needed materials to a contractor. This type of bond may be relevant for contractors who also furnish building materials for projects on which they may not actually perform the work.
- Maintenance Bond – A Maintenance Bond guarantees that the workmanship you provide on a project is dependable enough to stand the test of time. In other words, a Maintenance Bond protects the client against losses caused by shoddy labor practices during construction or materials defects for a predetermined length of time after the project is completed.
- Subdivision Bond – Also called an Improvement Bond, this is often required by a municipality or public agency before entering into a contract for a new development. A Subdivision Bond basically requires the contractor to make certain improvements to the property or structure(s) over a certain period of time after the development is finished at the contractor’s expense in order to be awarded the initial contract.